Elan, in the matter of Guild Enterprises Australasia Pty Ltd v Cohen

Federal Court of Australia|2020-02-07|Before: Reeves J

The Plaintiff has leave to manage the affairs of Guild Enterprises Australasia Pty Ltd as its sole director subject to the following conditions: (a) That at all times while his disqualification under s 206B(3) of the Corporations Act 2001 (Cth) continues, the Plaintiff will not cause Guild Enterprises Australasia Pty Ltd to engage in activities other than those required by, or incidental to: (i) its conduct of Supreme Court proceeding BS11566/2016 or related proceedings, such as any appeal; (ii) its opposition to any winding up or deregistration application brought against it; and (iii) maintaining its status as a registered company. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REEVES J: 1 Mr Guy Elan is an undischarged bankrupt. One effect of his bankruptcy is to remove his capacity to manage a corporation (see s 206B(3) of the Corporations Act 2001 (Cth) (the Act)). That presents a difficulty for the company Guild Enterprises Australasia Pty Ltd (Guild Enterprises) because Mr Elan is its sole director. Compounding that difficulty is the circumstance that Guild Enterprises is the plaintiff in litigation that is currently proceeding in the Supreme Court of Queensland. To attempt to address this state of affairs, Mr Elan has applied under s 206G of the Act for leave to manage Guild Enterprises so that it can continue to conduct that Supreme Court proceeding. 2 The defendants to this application, Mr Yoram Cohen, TGLSC Holding Pty Ltd and AC2C Pty Ltd (who I will jointly refer to henceforth as "Mr Cohen"), are the defendants in the Supreme Court proceeding. For the reasons set out in detail below, they oppose Mr Elan's application. Before addressing that opposition, it is convenient to outline briefly the factual background to the application.

THE FACTUAL BACKGROUND 3 Guild Enterprises was incorporated on 6 July 2004. Apart from the difficulty mentioned above to which this application is directed, it also suffers another deficiency. Its sole shareholder, Guild Enterprises International Ltd, a company that was until recently registered in the United Kingdom, has been deregistered for failure to pay its annual registration fee. I will return to this matter later in these reasons. 4 Guild Enterprises' business was the import and distribution of consumer goods in Australia and New Zealand, including the import and sale of products to other wholesalers. It no longer trades as such. Its only activity at present is to pursue the litigation in the Supreme Court of Queensland mentioned above. In that proceeding, Guild Enterprises alleges that it sold its subsidiary, AC2C Pty Ltd (the third defendant to this application), to TGLSC Holding Pty Ltd (the second defendant to this application), but was not paid the sale price of approximately $800,000. It is therefore seeking to recover that amount. That proceeding is at an advanced stage. Pleadings have been completed and, if this application is granted, Mr Elan has deposed to his intention to cause Guild Enterprises to seek trial dates in the event that settlement negotiations do not result in a resolution of the dispute.

MATERIALS 5 In support of his application, Mr Elan relied upon three affidavits, all made by him. Those affidavits were variously filed on 16 October 2019, 4 December 2019 and 10 December 2019. For his part, Mr Yoram Cohen filed and relied upon an affidavit made by him and an affidavit made by his lawyer, Mr Mark Dillman.

CONTENTIONS 6 In his submissions, Mr Elan's counsel contended that the primary consideration in an application under s 206G of the Act is the protection of the public. He submitted that the Court could be confident that the public would be protected if this application were to be granted because of the limited nature of the leave sought and the fact that Mr Elan is willing to agree to the conditions proposed by the Australian Securities and Investments Commission (ASIC). ASIC set those conditions out in its letter to Mr Elan's lawyers dated 15 November 2019 as follows: Guy Elan be granted leave to be a director of and to manage Guild Enterprises Australasia Pty Ltd (ACN 109 911 159), with such grant being on condition that at all times while his disqualification under s206B(3) continues: (a) Guild Enterprises Australasia Pty Ltd (ACN 109 911 159) not engage in activities other than those required by or incidental to: (i) Supreme Court proceedings BS 11566/2016 or related proceedings such as any appeals; (ii) maintain its status as a registered company; and (iii) winding up or deregistration. (Italics omitted) Mr Elan's counsel also emphasised that neither ASIC, nor his trustee in bankruptcy, has sought to oppose the present application; that Guild Enterprises does not have the financial means to hire a paid director; and that Mr Elan has been unable to find anyone willing to act as its director, let alone to do so voluntarily. Finally, he submitted that there was nothing in Mr Elan's conduct, or background, which suggested that leave ought not to be granted to him. 7 Mr Cohen's counsel contended that there were five reasons why this application should not be granted. First, he relied on the matter mentioned above, that Guild Enterprises' sole shareholder, Guild International, has been struck off the United Kingdom Register of Companies and was dissolved on 16 July 2019. This meant, so he contended, that Guild Enterprises does not comply with s 114 of the Act, which provides that "a company needs to have at least one member", and it is therefore liable to be wound up under s 461(1)(d) of the Act. That section provides that: "The Court may order the winding up of a company if … the company has no members". 8 Secondly, he pointed to, what he described as, a number of "false understandings" in the affidavits Mr Elan filed in support of this application. He claimed that the first of those appeared in Mr Elan's first affidavit where he stated that he was the sole shareholder of Guild Enterprises. It should be noted that this statement was later corrected in Mr Elan's third affidavit, where he disclosed that the sole shareholder of Guild Enterprises was, in fact, Guild International, as mentioned above. The second was the related statement in Mr Elan's third affidavit that he had only "recently discovered" that Guild International had been deregistered in the United Kingdom. Mr Cohen's counsel claimed that this was a "false understanding" because, in a letter dated 9 September 2019, Mr Cohen's lawyers had alerted Guild Enterprises' lawyers to that fact. The third and final "false understanding" was the reliance in Mr Elan's second affidavit on the correspondence passing between his lawyers and ASIC in the course of which they stated on his behalf that "there are no other civil, criminal or administrative action[s] against our client at this time". Mr Cohen's counsel claimed this statement was false because there is evidence in Mr Cohen's affidavit of an unsatisfied judgment in the District Court of New South Wales against Guild Enterprises for a sum in excess of $165,000. 9 The third reason for Mr Cohen's opposition to this application concerned Mr Elan's claim that there was no other person willing and able to become a director of Guild Enterprises. On this aspect, Mr Cohen's counsel pointed to the fact that Mrs Hila Elan was a director of Guild International before it was deregistered in the United Kingdom. He claimed that, in the absence of an affidavit from Mrs Elan, it should be inferred that she is willing and able to act as a director of Guild Enterprises. 10 Fourthly, Mr Cohen claimed that Mr Elan has not shown that he would suffer any personal hardship if the leave he has applied for were not granted. 11 Fifthly, and finally, Mr Cohen contended that Guild Enterprises has no assets and, as mentioned above, has an outstanding judgment against it in the District Court of New South Wales. In those circumstances, Mr Cohen claimed it was unlikely to be able to pay any costs order that may be made against it in the Supreme Court proceeding. That being so, Mr Yoram Cohen contended that it would be unfair to him and his fellow defendants to grant the leave Mr Elan has sought so that he may continue to cause Guild Enterprises to prosecute the Supreme Court proceeding against them.

THE RELEVANT PRINCIPLES 12 Section 206G of the Act relevantly provides: (1) A person who is disqualified from managing corporations may apply to the Court for leave to manage: (a) corporations; or (b) a particular class of corporations; or (c) a particular corporation; if the person was not disqualified by ASIC. … (3) The order granting leave may be expressed to be subject to exceptions and conditions determined by the Court. Note: If the Court grants the person leave to manage the corporation, the person may be appointed as a director (see section 201B) or secretary (see section 204B) of a company. … 13 The primary consideration in an application for leave under this section of the Act and its predecessor was identified by Street J in Re Altim Pty. Ltd. [1968] 2 NSWR 762 at 764 as follows: It should be borne in mind that the section is not in any sense a punishment of the bankrupt. Nor should a refusal to grant leave under the section be regarded as punitive. The prohibition is entirely protective, and the power of the Court to grant leave is to be exercised with this consideration in the forefront. (Emphasis added) See also Friend v Corporate Affairs Commission (1988) 7 ACLC 106 at 115 per Powell J; Didovich v Australian Securities and Investments Commission (1998) 29 ACSR 122 at 126 per Austin J; and Re Watts (2011) 284 ALR 403; [2011] FCA 1185 at [14] per Yates J. This, and other considerations, were conveniently summarised by Lindgren J in Adams v Australian Securities and Investments Commission (2003) 46 ACSR 68; [2003] FCA 557 (Adams) at [8] as follows: 1. The applicant bears the onus of establishing that the Court should make an exception to the legislative policy underlying the prohibition. 2. That legislative policy is one of protecting the public, not one of punishing the offender. 3. Another objective is to deter others from engaging in conduct of the particular kind in question. 4. A further objective is the more general one of deterring others from abusing the corporate structure to the disadvantage of investors, shareholders and others dealing with a company. 5. The prohibition itself contemplates that there will be hardship to the offender. Therefore hardship to the offender alone is not a persuasive ground for the granting of leave. 6. The court in exercising its discretion will have regard to the nature of the offence of which the applicant has been convicted, the nature of his involvement, and the general character of the applicant, including his conduct in the intervening period since he was removed from the board and from management. Where, as here, the applicant seeks leave to become a director and to take part in the management of particular companies the court will consider the structure of those companies, the nature of their businesses and the interests of their shareholders, creditors and employees. One matter to be considered will be the assessment of any risks to those persons or to the public which may appear to be involved in the applicant's assuming positions on the board or in management. (Citations omitted) See also Duffy, In the matter of Westgate Ports Limited (ACN 096 501 727) (2010) 79 ACSR 267; [2010] FCA 608 at [19] per Gordon J and Carey, in the matter of Carey [2011] FCA 235 at [31] per Barker J.

CONSIDERATION 14 According to his affidavits, Mr Elan has 38 years of experience, managing companies on four continents. He explained that his bankruptcy arose from a debt owed under a personal guarantee which he provided in 1996 in respect of a company which traded in the United States of America. That company defaulted on its loan and a judgment was entered against Mr Elan on his personal guarantee in a court in Israel. That, in turn, led to a judgment being entered for that debt in the District Court of New South Wales. Because Mr Elan could not afford to pay that judgment, he was made bankrupt on 15 August 2019 by order of the Federal Circuit Court. 15 As is mentioned above, Mr Elan is disqualified from managing Guild Enterprises because of that bankruptcy. He was not disqualified because he has misconducted himself as a director of Guild Enterprises, or contravened any of the provisions of the Act. That is to say, there is no evidence that he is an "offender" in the sense described by Lindgren J in Adams, or that he has abused his position as a director of Guild Enterprises to the disadvantage of any member of the public who has dealt with that company. 16 In those circumstances, I do not consider there is anything to indicate that the protective purpose of s 206G of the Act will be adversely affected if the leave Mr Elan seeks is granted. That is reinforced, in my view, by the confined scope of the activities Mr Elan wishes to cause Guild Enterprises to undertake and the additional protection that will be provided by imposing conditions along the lines of those proposed by ASIC. 17 As for the matters raised by Mr Cohen, I do not consider any of them detracts from these conclusions. The fact that Guild Enterprises' sole shareholder has been deregistered in the United Kingdom does not mean that Guild Enterprises itself has ceased to exist as a company in Australia. That is to say, there is no evidence that the corresponding provision of the Act, namely s 601AD, has yet been applied to Guild Enterprises, or that any proceeding exists directed to achieving that outcome. As for s 461(1)(d) of the Act, even if Guild Enterprises is liable to be wound up under that provision, there is no evidence that any such application has yet been made, or is in contemplation. In this respect, it is important to note that Mr Elan has stated in one of his affidavits that he is taking steps to remedy this situation. Finally, and in any event, in the circumstances outlined above, it is difficult to see how these matters pose any risk to the public if Mr Elan were given leave to manage Guild Enterprises for the limited purpose of conducting the Supreme Court proceeding. 18 As for the "false understandings" advanced by Mr Cohen, while it is a matter of concern that Mr Elan erroneously claimed to be the sole shareholder of Guild Enterprises, as I mentioned above he ultimately corrected that error in his final affidavit. Furthermore, when the statement Mr Elan's lawyers made to ASIC about the absence of any "civil, criminal or administrative action" against Guild Enterprises is considered in the context of the question that ASIC had posed, namely to provide "details of any other civil, criminal or administrative action brought against him in relation to the management of any companies" (emphasis added), I do not consider that statement constitutes a "false understanding". 19 I also fail to see how, in the circumstances of this matter, an inference can be drawn from the absence of an affidavit by Mrs Elan explaining whether, and if so why, she is unable, or unwilling, to act as a director of Guild Enterprises. As well, I do not consider the absence of any personal hardship to Mr Elan is a pertinent factor. On this aspect, I respectfully agree with Jagot J in Minus, in the matter of ABCD Corporation Pty Ltd [2019] FCA 1523 at [46], where her Honour explained why hardship is not a necessary requirement in an application of this kind. Alternatively, even if such an inference were open to be drawn, and/or personal hardship were a prerequisite, it is difficult to see how either of those factors would increase the risk to the public if Mr Elan is permitted to manage the affairs of Guild Enterprises for the limited purpose he has sought. 20 This latter consideration also applies to the final matter raised by Mr Cohen, namely Guild Enterprises' capacity to meet an order for costs in the Supreme Court proceeding. Even if that were a valid consideration, Mr Yoram Cohen and his fellow defendants in that proceeding have the opportunity to address their concerns in that regard by seeking security for costs in that proceeding. In this respect, it is important to note that there is no evidence that any such application has yet been made.

CONCLUSION 21 For these reasons, I propose to grant leave to Mr Elan to manage the affairs of Guild Enterprises for the limited purpose he has identified. That leave will be subject to the conditions proposed by ASIC, appropriately amended, as follows: That at all times while his disqualification under s 206B(3) continues, Mr Elan will not cause Guild Enterprises to engage in activities other than those required by, or incidental to: • its conduct of Supreme Court proceeding BS11566/2016 or related proceedings, such as any appeal; • its opposition to any winding up or deregistration application brought against it; and • maintaining its status as a registered company. 22 Finally, in order to attempt to avoid any confusion that may arise from silence on this matter, I record the distinction that exists between Mr Elan having leave to manage the affairs of Guild Enterprises for the limited purpose of conducting the Supreme Court proceeding and him being able to represent that company in that proceeding. As with any application for security for costs mentioned above, this is a matter entirely for the Supreme Court. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves.

At a glance

Court

Decision date

Before

Source

Judgment (8 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (6)

Cited By (2)